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spk02: Good afternoon, ladies and gentlemen. Thank you for joining today's March X fourth quarter earnings conference call. My name is Tia, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to your host, Trevor Caldwell, Senior Vice President, Strategic Initiatives and Investor Relations. Please proceed.
spk07: Thank you, Tia. Thanks for your help. Good afternoon, everyone. You're welcome to March 1st's business update and fourth quarter 2022 conference call. Joining us today are Edwin Miller, our CEO, Michael Renz, our vice chairman. Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements, including references to our financial and operational performance, and actual results may differ materially from those contemplated by these forward-looking statements. Risks and uncertainties that could cause these results to differ materially are set forth in today's earnings press release and in our most recent annual and quarterly report filed with the SEC. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements for subsequent events. During this call, we will present both GAAP and non-GAAP financial measures. Reconciliation of GAAP to non-GAAP measures is included in today's earnings press release, The earnings press release is available on the investor relations section of our website. At this time, I would like to turn the call over to Edwin.
spk06: Thank you, Trevor. Good afternoon, everyone. Thank you for joining us today. This is my first earnings call as a CEO, as a new CEO for MarchX. I do have a long history of leading and scaling technology companies, and I'm excited to join MarchX because it's world-class solutions and exceptionally talented team. I'm eager to build on the work that's been done prior. All I see myself providing the most value is through my operational experience of turning strategies into tangible results. I want to lead us in this space and do everything to help us get there. In the months since I joined MarchX, I've been orienting myself in the business, meeting many of our talented people. As you know, MarchX has been at the forefront of an exciting opportunity in the conversational intelligence market. From my vantage point, our shot is clear. MarchX sits at the confluence of conversational data and artificial intelligence at the very moment that our largest commercial customers need to streamline and transform complex and outdated technology ecosystems. We are helping these companies adapt to a data science and AI-driven future. The future of sales will require understanding of your customers or prospects and their needs at the moment the business interacts with them. Sales and training processes will have to be augmented, if not reimagined. The fact is real and has the potential to transform the financial characteristics of March X. Not only that, conversational intelligence has the power to transform the way businesses function. It will change the way businesses sell and deliver customer service experience. From an operations standpoint, I see this as a tectonic shift and we're committed to being at the forefront of this endeavor. So far, I've observed how MarchX has built foundational relationships with leaders across many large commercial verticals, including several Fortune 500 customers. These relationships have grown over the last several years and just as importantly, have significant potential to grow even more in the future. In fact, we recently signed our longest multi-year agreement with a Fortune 500 customer, which in and of itself represents an extraordinary commitment to March X. On our end, this is a pivotal opportunity to transform the bottom line of an enterprise auto manufacturer, a company which needs help transforming how they sell with exactly the kinds of problems our AI-based solutions solve for. We believe that this customer will sell more by working with MarchX a lot more in the future. Our expansion potential here goes hand in hand with MarchX's new auto dealer strategy to secure more dealers getting onto our platform. The company added more than 300 dealers in just the last 12 months through product and channel partner adoption. And that is the tip of the iceberg. We believe the auto vertical, which is our largest vertical, can hit accelerating double digit growth as we exit the year. At a high level, here's what you can expect of us this year. In 2023, we're going to focus on accelerating the business through continued innovation with award-winning products. While expanding relationships with many of our industry-leading Fortune 500 customers, we also plan to unlock new channel opportunities through partnerships and deepen existing relationships. And we look forward to going fast. I believe Marcek has the potential to build a $100 million business on an annual revenue basis. The market is right, and most importantly, our existing customer base of the Fortune 500 customers can and want to do significantly more with us. There's a lot of opportunity in our existing customer base, and we expect to expand the customers we work with. Plus, SmartCheck has a large and valuable conversation data set that will help us leapfrog innovation in data science and AI. I look forward to connecting with all of you and updating you further in the coming periods. I'll now hand it over to Mike Renz.
spk05: Thank you, Edwin. We are very glad to welcome you and to have you on board. We'll talk more in a little bit about that. But first, the financial results for the fourth quarter of 2022. The results were mixed. Revenue was $12.3 million versus $12.8 million for the same quarter last year. we saw continued pressure on conversation volumes due to the macroeconomic environment impacting certain customer types, along with the typical seasonal flow of call volumes impacting the sequential and annual comparisons. For instance, there was pressure with portions of our smaller customers, as well as with our small business listing and solution providers that mostly sell marketing services to local businesses, as they faced greater customer churn compared to 2021. That trend manifested over the latter part of 2022 and is one they were watching closely as the new year begins. At the same time, we continued to sign new customers across several verticals and signed our longest multi-year term commitment from a Fortune 500 customer in our history. Looking ahead, we see several expansion opportunities in certain verticals for 2023 and beyond. I'll dive into this more in a moment when I discuss our initial guidance for 2023. But first, turning to the P&L for the fourth quarter. Excluding stock-based compensation, amortization of intangible assets, and acquisition or disposition-related costs, total operating costs for the fourth quarter were $14.6 million compared to $13.1 million in the fourth quarter of 2021. Service costs were $5.6 million for the fourth quarter. Service costs increased on a year-over-year and sequential basis in part due to increased data and labor costs associated with customer migrations onto new product platforms and increased staging investment in our AI technology initiatives as we prepare for new product launches scheduled for the first half of 2023. Several of these investments are of a fixed nature and therefore, over time, We believe we will see a positive impact on service costs as a percentage of revenue as we sell through our new conversational intelligence products and advance our new channel initiatives. Sales and marketing costs were approximately $3.1 million. This was largely in line with comparative periods. Product development costs were $3.8 million and were up as a percentage of revenue compared with the fourth quarter of 2021. as we continue to invest in our future product pipeline that is staging for several customer pilots beginning in the first part of 2023 and in enhancing our AI-driven conversational intelligence capabilities. Moving to profitability measures. Adjusted operating loss before amortization for the fourth quarter was $2.3 million. Corresponding adjusted EBITDA was a loss of $1.7 million, reflective of the increased staging investments. Gap net loss was $3.6 million for the fourth quarter of 2022, or 8 cents per diluted share. This compares to a loss of $2 million, or 4 cents per diluted share, for the fourth quarter of 2021. Adjusted non-gap loss was 5 cents per share for the quarter, compared to a loss of 1 cent per share for the fourth quarter of 2021. Additionally, we ended the fourth quarter with $20.5 million in cash on hand. And during the quarter, we are pleased we were able to further reduce our total share equivalents going forward by 1.34 million shares through the southern end of a 2023 contractual commitment for $1.5 million in cash and a prospective liability of $335,000. Now turning to our outlook. Certain customer segments continue to face pressure at the start of the year and therefore for the first quarter of 2023, we believe revenue should be similar to the fourth quarter of 2022 with the potential for a modest increase. We also believe with several new and ramping customer relationships, we should see sequential revenue growth from Q1 over the course of 2023. And additionally, Once we take into account certain restructuring expenses, we believe we will be near a similar range on an adjusted EBITDA basis for the first quarter of 2023 compared to the fourth quarter of 2022. This contemplates the exclusion of a few restructuring expenditures for operating activity modifications, which we anticipate will be largely weighted to the first half of the year and should enable greater leverage and consequently significant improvements and profitability measures over the course of 2023 and potentially reaching at or near break-even on an adjusted EBITDA basis in the back half of the year. This year, we expect to make further progress with several large customer expansion opportunities as highlighted by our recent announcement regarding a long-term Fortune 500 customer commitment and traction with our auto dealer sales channels. We believe this large enterprise relationship has significant opportunity to grow over time and we expect to make additional inroads with our auto dealer sales channel this year. This traction, we believe, will lead to accelerating double digit growth on an annualized run rate year over year basis by the end of the year in our auto vertical. These are just two examples of our pipeline of opportunity within our existing base of customers and we see several other opportunities. We are winning mindshare in verticals like auto, auto services, and other industries as the leaders within these verticals look to do more with MarchX and expand our product footprint within their retail basis. We also have the opportunity to drive a more meaningful growth profile over time and deliver significant operating leverage in the business. Our current financial profile achieves enhanced profitability and can support incremental investment as it approaches $60 million in annualized revenue run rate. Some of our new products carry incremental gross margins in excess of 80%. As we execute on our sales and technology infrastructure initiatives, we believe the business will make additional progress toward an enhanced revenue and profit margin profile this year and beyond. Now, with that said, I'd like to share some broader commentary on our business. First off, I wanted to express that I'm excited to welcome Edwin to the team. We believe he has the right combination of technology, operational, and customer experience, as well as the strategic talent to take us to the next level. MarchX has a tremendous opportunity, and we believe now is the time for the company to align to capture the unique opportunities in the conversational intelligence market. While we are in an uncertain economic climate, we continue to believe MarchX is well positioned to emerge as a leader in conversational intelligence. Our products help businesses solve critical sales and customer experience challenges. Our innovation engine is leveraging data science to help large businesses understand how to better sell more and more effectively through their retail networks. And meanwhile, we are investing significantly to move our infrastructure and customers to a common platform that will serve as the basis of our future innovation and enable the company to move faster. This investment gives MarchX the flexibility to add new products and features that we believe will enable us to accelerate growth and potentially add significant operating leverage over time. And once again, I want to thank all of our employees for their dedication and continued efforts. And with that, operator, we will hand the call back to you.
spk02: We will now begin the QA session. If you would like to ask a question, please press star followed by one or your touch-tone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question.
spk01: We will pause here briefly to allow questions to generate in queue. The first question comes from the line of Michael Lattimore with Northland Capital Markets.
spk02: Please proceed.
spk04: Thank you. Yeah, good afternoon and congrats on the new position, Edwin.
spk06: Thank you.
spk04: In terms of the auto vertical, can you remind me roughly what percent of revenue auto is today?
spk05: So, Mike, this is Mike. The automotive vertical is our largest vertical today, and it represents near 25% of our total revenues as we operate. We did speak in some of the prepared commentary of note that the auto vertical is one of the areas we actually see some of the opportunity for meaningful growth. And we do think by the end of this year, it has the opportunity for double digit and accelerating growth profile on a year over year basis.
spk04: Great. And then in terms of areas of weakness, you call that smaller customers or those in the marketing. Can you just elaborate a little bit more on the verticals there or what you're seeing there?
spk05: The primary areas that we see is the small business and the listing solution providers that work with local businesses. Those resellers or listing providers to local businesses on a year-over-year basis had more decline, more churn than in any of the other areas we had on a year-over-year basis. So sequentially, And we also had seasonality impact the business as we normally do. Service-based conversations declined generally in the fourth quarter around the holiday time frame. So that was another reason for some of the sequential decrease from the Q3 to the Q4 time.
spk04: And then you talked a little bit about seeing maybe sequential growth throughout the year. Is that largely tied to these new customer ads? or are you expecting some macro improvements?
spk05: So there's multiple parts to it. The first part I think I'll answer, and I'll just be very direct with the macro environment. We're not actually anticipating in some of our comments and remarks with the go forward any updates or improvements necessarily from a macro economic environment. We do think that could be a lift or an opportunity if that does play out. One of the things we have is we've been staging and putting different things together from our infrastructure investments, getting some of our existing customers where we think we've got some very robust conversations to expand the relationship onto our platforms that allow for access to our new features as well as the new products that are coming to market. And we have several new products that are slated. In particular, in the first half of the year, we have pilots that are scheduled And those pilots are initiation opportunities for a go-forward growth opportunity where we can monetize those new products if we're able to onboard and execute towards getting those customers to sign up. We have deep investment with some of the OEM relationships in the auto vertical. There's not just expansion of existing relationships. There's also new relationships we have. We spoke in our prepared commentary about channel relationships in the auto dealer sales initiatives. And auto dealers, as an example, go back just a couple of years ago, we saw that as an opportunity to take some of our product opportunities and go directly to the dealer versus just the OEM. And we started staging that a number of years ago. And this past year, we put a lot of effort into a direct sales initiative as well as channel partnership opportunities. And to that end, we were successfully able during 2022 to be able to deploy over 300 individual dealer relationship engagements through both the direct sales efforts as well as the channel partnering opportunities. It is those areas that we actually think we'll be able to continue furthering our growth opportunity in 2023. And we see it as a big area of investment, not just for this current year, but for how that stages on a go-forward basis. The other thing that Edwin will note, I think, is one of the prepared remarks he spoke about was an opportunity where he sees growth for the business. And I think, Edwin, it would be helpful for you to give some of the added context about why you feel over the next number of years there's actually some of the robust growth opportunity.
spk06: Yeah, happy to. So although I've only been here less than 30 days, What I've learned so far, the opportunity to business is extremely real. I spent close to 75 days ahead of joining, learning about the business and getting excited about the talent and the customers. This is the future. All the businesses that I'm seeing need help in sales and marketing. AI is the future. The amount of conversation intelligence we have as data sets is really strong. So the ability for us to go and continue to engender trust and grow existing relationships and find new ones based on the size of companies you've already signed, it's absolutely an astonishing opportunity right in front of us.
spk04: Great, great. And then just on the AI topic, generative AI has gotten a lot of attention lately, probably rightly so. But do you see a way to build on that or leverage that in your business over the next year or so?
spk06: Absolutely. So I come out of a technology background. I've been at it for a little over 30 years. And the ability to build math and modalities around what we currently do and help clients, our customers, monetize their relationships is a real path forward. And I've I've probably had, I don't know, 45 plus conversations with individuals. I've met the entire product management team, impressive group of people, real skills in and around AI and math and machine learning. So I'm very excited about that future.
spk00: Okay, great. Thanks.
spk06: You're welcome.
spk02: Thank you. The next question comes from Delana Darien with Roth MKM. Please proceed.
spk03: Hi, it's Delana for Darien. Thanks for taking the questions. First, if you look at sort of the volumes that were down overall on a year-over-year basis, but then you talk about some of the larger verticals being up, can you sort of talk to the split between those, like, I mean, I'm assuming that's just a percentage of total volume and not revenue, but I guess like how big of an impact are the smaller verticals having as a drag on the ones where you're seeing growth?
spk05: Hi, Dylan. This is Mike. Thanks for the question. A couple of notations, and some of this may be regurgitative from our prepared comments, If you look at the conversation volumes, there's the smaller customers and then the small business listing, the providers that work in large part with some of the local accounts. Those providers all around, they had a meaningful decrease on a sequential basis, which are affected seasonality, but also on a year-over-year basis. In some cases, especially with the small business listing solution providers to local businesses, they were down well over 20% when we look at those comparative periods. In addition to that, we have the seasonality and the opportunity with seasonality in the fourth quarter with service-based businesses is muted around the holiday season in particular when consumers engaging with service-based businesses isn't as robust as at other times of the year. And so that historically on a Q3 to Q4 basis, is seen in that 10% to 15% aggregate range. Now, what we saw contrasting that was not only some of our volumes in a couple of the verticals like automotive and home services staying relatively stable even though there was the seasonality levels, but furthering and part of the reason for our outlook on the sequential revenue growth basis right now is our long-term pipeline expanded and we had more discussions about staging for some of our new product pilots we have more incubation of those test pilots staged for the first part of the year than we did in the middle part of 2022. so those trends from a volume perspective we'll see how it plays out but we are forecasting right now sequential movement in the revenue upwards as we progress through 2023.
spk03: Thank you. And then with the research and development, you sort of spoke to some of those starting to pay dividends in terms of product launches in the first half of this year with AI. Do you think that there's more investment that you need to make to get you back to growth or is it some of it or the bulk of it already done?
spk05: So in our remarks, we've indicated some of the thoughts about the fourth quarter and what we think in the first quarter. Those investments are continuing. We're working diligently. We've moved some customers over onto our primary platforms that allows for the upside of them getting access and then ultimately us being able to monetize when they engage with our new features as well as the new products. In some of our remarks, the large customers in some cases have migrated already here as we sit here in the first quarter. And so they are in a position to be able to pilot and take charge of getting access to those features. And we'll see how that goes from an execution standpoint. But again, it's part of the reason why we think the revenue opportunity has room for sequential growth. We also think onboarding some of the existing auto dealer relationships at the dealer level onto our platform with over 300 here in this past 12-month period. And that opportunity gives access to new product features as well and potential upsells to that existing client base that we already have in the auto dealer body. So in terms of investment, what I would say is we're staged and stable for the time being. We actually have some things from an operating perspective that are fixed in nature. So with the sell-through, we actually see some pretty significant improvements operating leverage and gross margin leverage as we progress with revenue progress over the course of 23. And more importantly, that stages beyond 2023 as well.
spk03: Thank you. And one more thing. When you talk about a potential return to break even or maybe better in the second half of the year, is that a reported quarter or is that just sort of a monthly number that you're getting back to?
spk05: You know, we haven't given any more specific specificity other than we're looking to be at or near breakeven in the latter part of the year. That's the forecast and the guidance. We obviously think with increased revenue and monetization, adoption of some of our new products, as we mentioned, some of the new products have literally 80% plus gross margin characteristics. It doesn't take that much from a revenue side to be able to get to that breakeven level or leverage. And as we near 60 million in annualized revenue run rate, that should put us in that position to be able to achieve those breakeven levels. And we do see moving towards that as we progress in the latter half of the year.
spk03: Great. Thank you.
spk06: I can add one thing to that. And part of what I've learned here early on is there's a a real opportunity to scale the existing relationships and new clients with our go-to-market motion. So I'm incredibly encouraged of what I've learned early on. So I think the second half of the year should be a very good time for us.
spk01: Thank you. There are no additional questions at this time.
spk02: I will now hand it back to the management team for closing remarks.
spk05: I wanted to say thank you again for everyone joining us today. We really appreciate the time. I wanted again to welcome Edwin, and we'll be providing further updates as we progress throughout the course of the year. We look forward to that. Thank you.
spk01: That concludes today's conference call. Thank you. You may now disconnect your lines.
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